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Monday, August 18, 2014

How the Internet of Things will make money as we know it obsolete

Money
almost rivals language as an amazing and ubiquitous invention, or maybe better
put, convention. We have trusted each other with exchanges of shells, salt,
coins, paper, and now ephemeral computer bits. What money you give to me for
what I have or do, I may later give to another in like manner. Liquid value. It
is believed that a currency arises naturally, as a durable, portable, and
universally desired commodity. Gold and silver fit that bill nicely. Chairs and
apples don’t (at least for now). For a long time, however, nations have issued
fiat money, which is backed by trust in the government to honor its value. This
allows government the power to rev and throttle the economy more efficiently as
need arises or, more cynically, as political machinations dictate. In the light
of coming technology, maybe it is time to revisit some old ideas about money.

Money has
become an abstract entity, untethered from material associations. Fortunately,
our brains are fully capable of dealing with abstractions. Or are they?
Abstractions are distillations that have a tendency to lack impact. For
example, numerous studies reveal the limitations of email and texting, forms of
communication that fail to carry visual and audible cues that are present in
the face-to-face encounters that people are so well adapted for. Likewise purely
factual information can fail to convey the emotional and motivational impact of
a topic, which might be hazardous if the topic is wealth.

If we go
back in history, wealth takes on more of a visible, tangible form. For example,
it has taken on the form of crafted artifacts, livestock, or the dimensions of
a dwelling. These are physical commodities. If a rich person has fifty sheep,
there are fifty bleating reminders of that wealth. In societies that use
commodities for money, the wealth of the society is grounded to actual
resources, goods, and services; more so than an abstract currency printed by
governments and doled out by banks. The manifestation of wealth and money in
forms that people can see, touch, and sense, even if indirectly, fits into a
conceptual framework that generally resonates more deeply with people.

Wealth satiation

At this
point, you may think this is an argument for returning to the gold standard or
some commodity currency like it. It is indeed along those lines, but to an even
greater extent only achievable with technology that is arising to implement it.
However, even if it were possible to do this, why dump the fabulously effective
and fluid money that we use today? One reason is to institute a satiation
mechanism for wealth that will curb an appetite which poses a serious threat to
society and the environment.

People
come with satiation mechanisms that tell us when enough is enough. They are
crucial to keeping us healthy and safe. Food is an obvious one. Your stomach
tells you when to start and stop eating in a very convincing fashion. We also
know when to wake up, when to sleep, how many tasks we can manage, how long sporting
events should be, etc. But what about numbers? What number is too big or too
little? It doesn’t make any sense unless you associate something with the number.
When money is only a number, you don’t say to yourself, that is enough, I’m
full now. Numbers do not satiate. So what do people associate with money
numbers? Things like sunny vacations, expensive food and clothes, gleaming
cars, and lavish houses. If you actually had all of these commodities in front
of you or in your portfolio, you might have a better notion of what is enough
and when to slow down. But with pure numbers this is left to flights of
imagination. Adding extra zeros on the end of a number aren’t as easy to
connect to reality as we might think.

“Greed has
no satiation point, since its consummation does not fill the inner emptiness, boredom,
loneliness, and depression it is meant to overcome.”

― Erich
Fromm

While the
desire for wealth is the principal driver for capitalism and all of the bounty
that it creates, we can see the excesses that it fosters. Although progress has
been made, the environment continues to be viewed as a resource to be plundered
with little forethought. Deforestation, species extinctions, and global climate
change are a few major casualties. Economically, a strong and invested middle
class, crucial to democracy, shrinks as wealth distribution skews ever more
toward a few at the top. Plutocracy, rule by the rich, is a real danger.

Capitalism
also suffers from never ending speculative bubbles that create false value,
inevitably popping and deflating into recessions. And this happens despite the
best efforts of governments and banks to manage the money supply. Although
these bubbles may be inevitable, the degree and frequency with which they occur
are often related to money that is backed by little but hope. On a darker side,
government manipulation of the money supply allows it to surreptitiously tax citizens
to fund pork projects and war efforts. Unfair trade imbalances have also been
erected by artificially fixing the value of currency. In response to these
forces, and aided by the internet, bartering networks are rising in popularity
as a means of directly exchanging value.

The Internet of Things

The
Internet of Things (IoT) refers to a state in which virtually everything is
connected to the internet in some way. Things are tracked as uniquely
identifiable and addressable entities, which in many instances can actively
communicate and respond to stimuli. IoT seems to be coming fast: in the next
few years, six billion objects in the world are predicted to be connected. The
hypothesis presented here is that IoT can be used to overcome the obstacles and
drawbacks for the use of commodity money. For example, gold is a durable, portable,
and universally desired commodity and has served as currency in many societies.
With IoT and the power of electronic commerce, other products and services that
have few of the properties of traditional commodity money might conceivably be
used as such.

As an
example, consider bushels of apples harvested in a distant orchard. The apples have
value relative to other products and services, and may be traded for them. The
owner of the apples, wanting to purchase an item, let us say a chair, could
consign them to a seller in exchange for the chair. In turn, before the apples
spoil, they could be traded for another product or service of value. Since
computing systems know about the apples, where they are, what it would cost to
ship them, and how long they will remain unspoiled, automatic exchanges are made
in the background to shift them into the most profitable position, for example
a local food market. Without intervention, that which an individual owns will
be constantly changing. In this sense, the arenas of commerce and finance would
effectively be merged into a single massive bartering system.

The use of
a just a few commodities as money can lead to unpredictable fluctuations as
supply and demand waxes and wanes. Alternatively, a diversified array of
products and services used as money will be less vulnerable to this type of
destabilization. And unlike a representative substance that is locked up in
vaults, working commodities are valued only for their inherent worth. The
wealth of an individual no longer is an abstract number on a balance sheet; it
is a changing portfolio of products and services. Computers can tell you what
you own in terms of apples or whatever trade commodities you wish to see, but
your wealth will always be grounded in real world entities.

Natural global currency

An
interesting property of IoT money, to give it a name, is that it is by
definition a natural global currency. The gross domestic product of a country
is simply the trade value of its assets. Banks will continue to serve the role
of investment houses, but much less that of money repositories. Governments
will continue to raise taxes, but will have a much reduced role in managing the
money supply, leaving this function to the market. Governments will no longer
be able to artificially manipulate the money supply since that is simply the
current value of goods and services.

If investment
house assets are backed by commodities that can be precisely monitored by
investors, this can serve to suppress risky investment impulses that in the
past have triggered speculative bubbles. Many investors will not want their
wealth loaned out in a risky fashion, or without assurances of getting a
profitable return on investment.

When a
commodity is used as a trade asset, there is a braking force on the overproduction
of the commodity, so as not to excessively devalue it. OPEC oil quotas are an
example. When many commodities are used as money, the braking will apply more extensively,
conserving resources. For example, if fish were used as commodity money, overfishing
will produce wealth and but also decrease the value of each fish. This is the
opposite of the case with abstract money, since the overproduction of wealth
increases the value of money.

For better or worse,
technology is crashing upon us with waves of change. The ways we communicate,
collaborate, and organize ourselves are shifting. It is worth taking a look at
even the most ingrained and cherished conventions to foresee opportunities that
may benefit society. Some decry the greed ethic that propels capitalism, but
there is no doubt that it has raised the standard of living of those adhering
to it. However, like a fire that flares and rages uncontrolled at times,
unbridled greed has left many victims, social and environmental, in its wake. The
speculation here is a possible way to add a moderating governor to the engine
of commerce and finance.